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Universal Bounds for Asset Prices in Heterogeneous Economies

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

July 2007

We establish universal bounds for asset prices in heterogeneous complete market economies with scale invariant preferences. Namely, for each agent in the economy we consider an artificial homogeneous economy, populated solely by this agent and calculate the homogeneous price of an asset in each of this economies. Dumas (1989) conjectured that the risk free rate in the heterogeneous economy must lie in the interval determined by the minimal and maximal of the homogeneous prices. We show that the answer depends on the risk aversions of the agents in the economy: the upper bound holds when all risk aversions are smaller than one and the lower bound holds when all risk aversions are larger than one. The bounds almost never hold simultaneously. Furthermore, we prove these bounds for arbitrary assets.

Number of Pages in PDF File: 15

Keywords: heterogeneity, asset prices, yield curve, bounds

JEL Classification: D91, E43, G12

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Date posted: July 25, 2007  

Suggested Citation

Malamud, Semyon, Universal Bounds for Asset Prices in Heterogeneous Economies (July 2007). Available at SSRN: http://ssrn.com/abstract=1002854 or http://dx.doi.org/10.2139/ssrn.1002854

Contact Information

Semyon Malamud (Contact Author)
Ecole Polytechnique Federale de Lausanne ( email )
Lausanne, 1015
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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